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S&P says pension comparisons near “impossible”

EUROPE – Standard & Poor’s says it may be “virtually impossible” to compare pension accounting across borders.

“Adjusting reported pension information to allow for a comparable comparison among rated companies is a complex undertaking and may be virtually impossible at times due to lack of sufficient information and disclosures, making the analyst to make additional estimates and assumptions,” it says.

“The accounting rules for pensions vary widely within Europe and between Europe and the US.”

In an 18-page report, “Navigating the International Pension Accounting Maze”, S&P said that an awareness of the differences is “critical” for credit analysts.

The ratings agency has identified six main areas where accounting rule diverge:
- Whether and how pension liabilities are presented on the balance sheet
- Whether pension obligations are offset by plan assets
- How pension costs are presented in the income statement
- Whether “smoothing” is permitted
- How the discount rate is determined
- Whether a pension surplus is an asset.

S&P says the exact amount of pension liabilities is not known on any balance sheet date “because pension liabilities are based on highly selective assumptions” about mortality rates, staff turnover, retirement dates and discount rates.

Another unknown factor was the timing of pension payments. It says: “Not all accounting standards reflect pension liabilities at the fullest amount on the balance sheet. In some cases, obligations may not be affected at all.”

It said “adjustments are necessary” when comparing rated companies for their pension obligations. S&P said it would welcome more comprehensive disclosure of the pension obligation to changes in actuarial assumptions.

S&P caused a stir in February when it put several large European companies on credit watch due to their pension liabilities. In March it said “views unfunded liabilities relating to defined benefit pension plans and retiree medical plans as debt-like in nature” – this approach has been criticised by rival agencies and asset managers.

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